All About Options

post 87: all those Greeks represent factors that will change an options price. The sum of them (and other factors) is the total change of the options price: a partial differential equation.

gamma is the change of delta to spot price. So it’s related to delta. It doesn’t go to inifinity because gamma changes with spot price too. Gamma is what makes options options: creates the hockey stick payout. The other Greeks (theta, Vega) are related to gamma.



expiated said:
Later this week I plan on consulting someone who knows options trading to get some clarity on this topic. So, let me start compiling my questions as I think of them so I don't forget about any when the time comes:

What do all the formulas in Post #87 mean in plain, simple, straightforward English. Don't give me all this "where this means that" gobbledygook. Insert whatever it is the symbols are referring to in the first place and stop using characters like δ and σ. Just go ahead and spell it all out in everyday language. (For instance, what in the heck are "first derivative" and "second derivative" actually referring to?)

Also, the description of Gamma in Post #77 makes it seem like Gamma is nothing more than a second, additional or supplemental Delta. So, why not just add it into the original formula instead of doing so after the fact? Is it because you add Gamma if the underlying stock price goes up, but you subtract Gamma if the underlying stock price goes down? If so, does this mean that Gamma's positive effect on Delta can (theoretically) continue into infinity, but that it's negative effect is capped when Delta minus Gamma eventually equals zero?

And why was Gamma added onto Delta the second time the stock price rose one dollar in Post #86, but NOT the first time? (Was it an error in the video?) And what happens if the stock price rises another dollar on the third day? Will the premium increase another $0.41, or will it be by some other amount?
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MORE QUESTIONS THAT CALL FOR CLARIFICATION (In My Mind)...

What are these people talking about when they keep referring to extrinsic value?

Extrinsic value is the difference between the market price of an option, also knowns as its premium, and its intrinsic price, which is the difference between an option's strike price and the underlying asset's price. Extrinsic value rises with increase in volatility in the market. ~Investopedia

Why is intrinsic price called intrinsic "price" then? Wouldn't it make more sense to call it intrinsic difference?

Intrinsic value represents the difference between the current price of the underlying security and the option's exercise price, or strike price. Essentially, intrinsic value exists if the strike price is below the current market price in regard to calls and above for puts. ~Merrill Edge

Wait a minute! Are we going to call this intrinsic price, or are we going to call it intrinsic value? In any case, if I understand this correctly, what you're basically saying is that: Extrinsic value is the difference between a difference. I don't find that very helpful. Please clarify this with some actual numbers so I can get a concrete picture of what in the world you're actually talking about.

I get it that the higher the underlying or "indicative" price is above the strike price, the more a call is worth; and the farther the indicative price is beneath the strike price, the more a put is worth. But, what does that have to do with the premium?

Is this all just a fancy way of stating that... The more an options contract is worth, the more the options contract is worth. Is that what this is all about? If so, then no kidding! Big duh!
 
The video in Post #92 says that intrinsic value is the executable in-the-money value of the option, whereas extrinsic value is made up of time value and implied volatility.

But wait a minute! Isn't the extrinsic value reflected IN the executable in-the-money value of the option? (No... you're thinking of the premium.)

My answer is YES, (but it shouldn't be... see the above comment in parentheses) because she then goes on to explain that the intrinsic value of the option is the difference between the market (indicative) price of the stock minus the strike price of the ABC options contract ($3.00) with the additional or "extra" $2.00 portion of the $5.00 premium attributable to the extrinsic (extra) value. So, based on THAT, it would seem to me that...

intrinsic value = indicative price - strike price

and

extrinsic value = premium - intrinsic value

(And I might also add: premium = intrinsic value + extrinsic value)
 
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I've blown this up so you can see all the numbers. They're kind of fuzzy/blurry, but I think you can still read them. When you have the time, take a look and see if you can figure out what all the columns represent. If you can, then go ahead and study the whole table to see if you can get a sense of how the Greek numbers interact with each other, the strike price, the premium and time of expiry.

Screenshot_10.png
 
expiated said:
I've blown this up so you can see all the numbers. They're kind of fuzzy/blurry, but I think you can still read them. When you have the time, take a look and see if you can figure out what all the columns represent. If you can, then go ahead and study the whole table to see if you can get a sense of how the Greek numbers interact with each other, the strike price, the premium and time of expiry.
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As best as I can figure, here's what I think each abbreviation stands for:

L = Last
Chg = Change
B = Bid
A = Ask
V = Volume
Dl = Delta
Th = Theta
ImpVol = Implied Volatility
Gm = Gama
Vg = Vega
OI = Open Interest
Strike = Strike Price
 
Okay, I went back to eOption's paper trading platform to see if I could figure out what was going on, and I'm thinking that the reason all the Greeks were showing zeros before might have been because I was looking at strike prices that were so far in and out of the money.

Anyway, in looking at AAPL with the underlying price at the center of the table, the chart is looking like how I expected it to look, which means I can finally start working on getting a sense of how the numbers interact without being limited to evaluating tiny, static, blurry and fuzzy pictures.

Screenshot_9.png
 
Okay, so if I scroll all the way up to the top of the columns, it says "13 days to expiration" directly above the top of these AAPL strike prices.

Screenshot_9.png


The strike prices look like they have an interval of exactly 2.50 between each.

The Call Deltas are all positive and ascend above 0.5 (at the strike price) initially by a little more than 0.1 and then gradually/progressively less than that as you move away. They descend below 0.5 initially by a little more than 0.1 and then gradually/progressively less than that as you move away.

The Put Deltas are all negative and become less negative (smaller negatives) above -0.5 initially by a little more than -0.1 and then gradually/progressively less than that as you move away. They become more negative below -0.5 initially by a little more than -0.1 and then gradually/progressively less than that as you move away.

Call Deltas max out once they reach 1.0000 and decline all the way down to 0.0000. Put Deltas max out at 0.0000 and decline all the way down to -1.0000.
 
DELTA & THETA

It looks like Theta is always negative, on both Calls and Puts. With Calls, the values begin a little above -0.1 (though technically, I guess it's a little below, since they are negative values), and with calls, they begin a little below -0.1 (i.e., -0.1103, -0.1072 and -0.0904, -0.0878 respectively).

Conversely, Delta is negative ONLY when it comes to Puts.

(I need to check to see if this is true concerning only LONG Calls and Puts.)
 
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